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Stock Alternatives: What are REITs and When to Use Them

Throughout your life you often earn cash the hard way, with hard work and determination, moving your way up through your career, climbing the corporate ladder, or starting your own business. When you have saved up enough money for a rainy day however, what do you do with that extra cash?
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Investing is a common way of taking extra hard earned cash, and making it work for you, instead of it sitting in a bank barely making enough to cover the costs of bank fees. Common investment opportunities include stocks, mutual funds, purchasing income property, REITs, and many other options. While most will choose the first few options, having a diversified financial portfolio is always beneficial to you, in order to protect yourself from a couple bad investments that go the wrong way. In this way, REITs are a great alternative to stocks.

What Are REITs?

REITs are real estate investment trusts, and are a good option to add to any equity or fixed-income portfolio. With REITs you will invest in a trust that owns and/or manages income-producing commercial real estate. These trusts will either be in the form of earning money through the rent on those properties, or through mortgages and loans on those properties. Many REITs are available, as you can invest directly into a single REIT or diversify further and invest in an exchange-traded fund, or mutual fund.

REITs Variety

There are a variety of REITs available on the market. As mentioned above, two of the main categories are those that directly invest in the properties and pay out dividends based on rental income or management fees, and the other is REITs focused on investing in real estate debt, earning money through mortgages and mortgage-backed securities. For a list of Canadian REITs check out ReitReport.

Beyond the main categories, there are subcategories that depend on the type of commercial property that is being invested in. These can include, but aren’t limited to residential properties, commercial properties, healthcare properties, industrial properties, hotels, and resorts, etc.

Some properties you may be more comfortable investing in, but as with any investment, you should always research the REITs you want to choose first to determine their historical track record and see whether you can actually make decent earnings.

When to Use REITs

Any good financial portfolio is diversified, and when it comes to REITs, you should choose to use a REIT if you are looking for an investment opportunity that is relatively stable, and often builds money faster than inflation. High-yield dividends are a big bonus to REITs, so will often be much higher than the average stock, and if you reinvest your dividends immediately back into the REIT you can build up your wealth quicker. Learn how REITs are taxed here.

REITs also give you the opportunity to invest in real estate, as not everybody has the funding available to just go out and buy a piece of a property.

REITs also have their own risks, such as being sensitive to interest rates, and certain properties are more risky investments. However, if you are looking to diversify your financial portfolio, REITs can be a high-liquid and smart way to invest some of your hard earned income.

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